If You Don’t Understand Home Financing It Can Be Costly

Once you are done looking at homes and decided on the one you want to buy, it is time to do the serious homework – finding the best type of financing for your new home. Let’s start with how much down payment will you need and what type of mortgage is available to finance your new home purchase?  Learn more about these financing options at Homes in Gainesville Florida.  A service of Gainesville Realty.

Down Payment Requirements

The minimum amount of your down payment will depend on your selected mortgage program. If you have a credit score of 580 or below and are applying for an FHA mortgage you are required to furnish 10% down payment for the purchase of your new home. This amount reflects the recent increase in the upfront mortgage insurance premium to 2.25%. If you are fortunate to have a credit score above 580 then you will be required to provide a 3.5% down payment towards the purchase of your home. You will need significantly higher down payment to qualify for a conventional mortgage, as much as 20% for certain situations. There are cases of conventional lenders that do offer down payment requirements as low as 5%. In the event you obtain a lower down payment conventional loan you could be required to buy private mortgage insurance. Of course the insurance is a safety feature for the lender should you default on the loan.

Types of Mortgage-Repayment Loans

Fixed Rate Mortgage Loans:

Advantages- Interest rate is fixed and does not fluctuate; Fixed rate loans are best used by home buyers plaan to stay in the home for periods in excess of 5 years. The terms of these loans range from 15, 20 or 30 years. There are even 40 year loans.

Disadvantages- A fixed rate loan would not be cost effective for a buyer who is planning to leave in less than 5 years. The cost would likely be higher than an adjustable rate mortgage.

Adjustable Rate Mortgage Loans:

Advantages- When a homeowner is planning to stay a short period of time in the home or looking to refinance the loan in the near future then adjustable rate loans can work. Many times younger homeowners choose adjustable rate mortgages. They are hoping  interest rates will decline or their financial situation improves then they can covert to a fixed rate loan.

Disadvantages- Monthly payments can be adjusted according to the term of the loan. Recently, because the maximum interest rate was not capped, interest adjustments caused the monthly payment to exceed the ability of the borrower to repay the loan. This resulted in the loss of the home to the borrower. When the borrower is negotiating the initial loan, they should be totally aware of the adjustable interest rate that can be charged. Look for a cap on the interest rate that be levied during the term of the loan.

Mortgage Programs

Federal Housing Administration (FHA) Mortgage Program:

The main purpose of the FHA loans is to make purchasing a home much more affordable, especially for the first time homebuyer. The amount of down payment cash for a conventional mortgage is usually out of reach for the person just starting on home ownership.

Veteran’s Affairs (VA) Mortgage Program:

When a mortgage is backed by Veteran Affairs there is little or no down payment requirement. However, VA mortgages have additional requirements.

a. VA loans are only available to military personnel or veterans or surviving spouses who have died from service related injuries.

b. Veterans are awarded a VA home loan benefits based on their military service and background. Veterans are still required to meet income and credit requirements to be eligible for their VA loan.

Conventional Mortgages

A mortgage that is not  insured by FHA or VA is a conventional mortgage. Conventional mortgages require the buyer to invest a larger down payment into the home purchase. Private mMortgage Insurance (PMI) can be required when Loan to Value ratio is above 80%. PMI insures the top part of the loan amount. PMI ceases when the loan is amortized down to 78% of the original appraised value.

You need to seek competent financial advice when looking for a mortgage loan when purchasing your home. Don’t rush and take the first offer that comes along. Remember you will have to pay this back. You owe it to yourself to find the right financing. You should be careful to select a qualified mortgage broker or loan officer when financing your new home.  For details and more information please visit Homes in Gainesville Florida.